Net Zero, Energy and Transport Committee
Meeting date: Tuesday, February 28, 2023
Agenda: Decision on Taking Business in Private, Subordinate Legislation, Ferry Services Inquiry, Subordinate Legislation
- Decision on Taking Business in Private
- Subordinate Legislation
- Ferry Services Inquiry
- Subordinate Legislation
Renewables Obligation (Scotland) Amendment Order 2023 [Draft]
Under agenda item 2, the committee will consider a draft statutory instrument. I welcome the Cabinet Secretary for Net Zero, Energy and Transport, Michael Matheson. Thank you for joining us today. I also welcome, from the Scottish Government, Aedan MacRae, energy policy officer, and Robert Martin, team leader, electricity security.
The instrument has been laid under the affirmative procedure, which means that the Parliament must approve it? before? it? comes into force. Following this evidence session, the committee will be invited, under the next agenda item, to consider a motion to approve the instrument. I remind everyone that the officials can speak under this agenda item 2, but not under the next agenda item.
I invite the cabinet secretary to make a short opening statement.?
Thank you, convener, and good morning.
The draft order under consideration is a minor amendment to the Renewables Obligation (Scotland) Order 2009. Before I move on to the amendment, it might be helpful to provide some background information on the scheme.
The renewables obligation scheme was introduced in 2002 to support renewable electricity generation projects. Equivalent schemes are in place in England and Wales and Northern Ireland, and are managed under separate legislation. All three United Kingdom schemes are administered by the Office of Gas and Electricity Markets. Throughout its existence, the Scottish obligations scheme has remained largely aligned with the England and Wales scheme.
The scheme closed to new generation capacity across the UK in 2017, but it will remain operational until 2037. Some 565 existing generators are accredited under it. That accounts for 8.8GW of renewables capacity in Scotland.
The obligation requires electricity suppliers to source a percentage of the electricity that they supply from renewable sources. Accredited renewable generators are awarded certificates according to their output per megawatt hour. They are then sold to suppliers. That incentivises renewable generation by providing projects with revenue in addition to the wholesale energy price.
Electricity suppliers fulfil their obligation by providing the required number of certificates to Ofgem in proportion to the amount of electricity that they have sold. Alternatively, they can make a fixed payment into a buy-out fund at a higher price than procuring certificates typically requires. That fund is then recycled back to suppliers that provided certificates to Ofgem. However, when some suppliers fail to meet their obligations, a shortfall in the fund is created, which reduces the value of any recycled payments. A mutualisation mechanism exists within the scheme to prevent excessive shortfalls. If the shortfall exceeds a certain threshold, existing suppliers are required to pay the unmet obligations of suppliers that did not meet their obligations. In each of the past five years, mutualisation has been triggered due to an increasing number of suppliers defaulting on their obligations.
The amendment order under consideration will alter how the mutualisation threshold is determined under article 48 of the Renewables Obligation (Scotland) Order 2009. The mutualisation threshold has failed to keep pace with the growth in the scheme and proportionality. It is now considerably smaller than it was when it was first introduced.
The aim of the amendment is to better protect customers by restoring the balance of risk between generators and suppliers. As the cost of the scheme to suppliers is passed on to consumers in their energy bills, any increased costs associated with mutualisation are also passed on.
The amendment will alter the mutualisation threshold for Scotland from a fixed value of £1.54 million to 0.1 per cent of the forecast costs of the scheme across the UK. It will also restore alignment with the scheme in England and Wales regarding mutualisation as the UK Government made a parallel amendment in 2021 to move to a variable level of scheme costs. Critically, the amendment will ensure that suppliers and, in turn, their customers are not more likely to face the costs of mutualisation in Scotland than they are in England and Wales.
Finally, a further provision is included in the proposed Scottish statutory instrument, allowing Ofgem to publish the mutualisation threshold for the 2023-24 obligation period as soon as reasonably practicable after 1 April. Ordinarily, Ofgem must publish the threshold before the new obligation period starts but, given that the SSI will not come into force until 31 March, it is allowed to publish the threshold later than that.
For the reasons that I have set out, I believe that the proposed amendment is necessary and proportionate, and I am more than happy to answer any questions before we move on to the debate.
Thank you, cabinet secretary. I have a quick question before I open up to questions from members. You said that the need for the amendment has come about because of suppliers defaulting. Could you explain how that happens and what sort of level it is at?
There are broadly three reasons for companies defaulting. Alongside greater volatility, greater competition in the marketplace results in suppliers dropping out of the market. We have discussed that at committee previously. The proportionate size of the mutualisation level has also failed to keep pace with the scale of the way in which the industry has developed. There are also aspects around the way in which companies pay into the scheme. For example, as it stands, some of the default comes about because the companies pay only on an annual basis, and that is sometimes after the end of the financial year. Ofgem is looking to move that payment to a quarterly basis where the money is ring-fenced during the year and, if the company goes out of business at the end of the year, that money can be recovered.
A variety of factors therefore result in companies dropping out of the marketplace and that then contributes to the overall cost of the mutualisation process and the defaulting on mutualisation, and that is why, given the volatility and greater competition of the past five years, we have seen a significant increase in the need for mutualisation to be exercised.
My slight concern about what you have just said is that those companies that are doing everything correctly are picking up the tab for those people who have defaulted. I am just trying to get my brain around whether that is right. Are you comfortable that it is right that those companies that abide by the scheme and do everything that they should do pick up the can for those that do not?
The scheme was designed on that basis. However, the much more deep-rooted issue—the committee has covered it previously—is the way in which companies, particularly suppliers, have been able to enter into the market without the necessary financial protections in place, and how that led to all the problems that we have had with higher costs and energy prices during the past 18 months in particular.
Ofgem is working on how it can put further protections in place to reduce the risk of companies falling out of the market so quickly and on greater financial protections for them because, in the end, the consumer ends up picking up all the associated costs. The threshold will help to make sure that the mutualisation process operates more fairly, which means that those who meet their obligations are not unfairly penalised because of other operators who do not meet their obligations.
There do not seem to be any further questions. You are getting an easy ride, cabinet secretary.
That makes a change.
I would not want to set a precedent.
We move on now to item 3, which is formal consideration of the motion.
That the Net Zero, Energy and Transport Committee recommends that the Renewables Obligation (Scotland) Amendment Order 2023 [draft] be approved.—[Michael Matheson]
Motion agreed to.
The committee will therefore report the outcome of the instrument in due course. I invite members to delegate the authority to me as convener to finalise the report for publication. Are members happy to do that?
Members indicated agreement.
Thank you, cabinet secretary and your officials who attended but were not put under any pressure.
I now suspend the meeting so that we can prepare for our next item.09:11 Meeting suspended.
09:14 On resuming—